The year just gone
06 Jan 2018
With Auld Lang Syne still ringing in the ears, it seems appropriate to look back at the year past and the year ahead.
It was a huge year in terms of politics and technology, leaving us all feeling uncertain about the future. Ethically based political correctness has alienated many people who are not feeling very happy about their lot in life. The reaction is championed, not by people that try to be even-minded in their thinking, but by those that openly reject the liberal ideology that defines Western culture of the last 50 years.
The outcome of these swings will be crucial to our future, but for investment markets, it was all a side show. The 2017 calendar year and the first half of the 2018 financial year have produced strong returns for investors.
While some of the issues that concerned investors at the start of the year, seem less of an issue as the new year begins, it is clear that Australia is out of sync with the improving drivers in the rest of the developed world. Twenty-six years without a recession has enabled imbalances to build within the economy, which now acts as a constraint to growth. Prior drags on the economy such as the unwinding of the mining investment are fading, but this is being replaced by a constrained consumer and world beating levels of household debt.
Given our high debt levels, falling house prices could have a dramatic impact on confidence and consumption. Apartment construction is slowing, but the government is coming to the party in the form of infrastructure spending, which will provide employment and activity as the property construction cycle slows.
Technological innovation is becoming our biggest long-term issue; however, the pace and direction of change is impossible to forecast. We are told that driverless cars are just around the corner and it seems the technology is available. However, if we cannot deal with cyber security, how could we possibly risk autonomous cars on our freeways? Would you drive a car that someone could hack into?
For 2018, there is scope for the recovery to broaden in Europe and the emerging world where macroeconomic risks are receding. The cycle is more mature in the US, but the leading indicators remain strong, pointing to robust corporate earnings. We remain wary of an uptick in inflation and the consequence of higher interest rates, which would result in significant market moves.
As they say, we live in interesting times (Chinese curse). “Fake News” or not, there has been an enormous increase in the flow of information, compared to any time in the past.
Happy New Year and we wish you all the best for 2018.
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